Martin Lewis: Have children at uni? A guide to student loans and how to repay them

Martin Lewis: Have children at uni? A guide to student loans and how to repay them

There’s a hidden crisis hitting student finance. Not the oft quoted “£50,000 debt” – in practical terms that’s mostly irrelevant, as its repaid after university and only if you earn enough.

Instead, as many students are discovering after their first few weeks of term, the real issue is the loan isn’t big enough – specifically the maintenance loan for living costs.

One reason for this is that the amount given is means-tested dependent on parental income, and that means-testing has increased, but none of this is communicated to parents. So let me take you through it.

I should note I’m focusing on English loans for English students. In the rest of the UK, the funding is more generous.

How much are parents expected to give their children to go to uni?

Tuition fees are paid for students by the Students Loan Company, and students are also eligible for a maintenance loan, both are repaid only after university, if the graduate earns enough.

Yet for almost every 18 to 25 year old, even though they are old enough to vote, get married, join the army and more, the amount of maintenance loan given depends on their parent’s household ‘residual’ income.

This is their total income before tax but after pension contributions, and it’s reduced by just over £1,000 if they already have a child at university (though most parents shell out far more).

The loan starts reducing at family income above just £25,000 and by £60,000 it’s roughly halved. And it’s implicit that the expectation’s parents will make up the difference - known as the ‘parental contribution’. Yet I think it should be made explicit.

Parents aren’t told they need to contribute

Many parents and students I come across complain the loan isn’t big enough, but when I tell them the Government factors in a set parental contribution, they’re shocked. It’s quite bizarre the government keeps this fact under the radar.

So I’ve written an open letter (see it here www.moneysavingexpert.com/JoLetter) to the Universities Minister Jo Johnson asking for the student loan entitlement letter to lay it out plainly, something like… “Students – your loan for living is £4,000 a year, this is less than the full loan and we expect your parents to make up at least the £4,200 difference.”

Transparency would help stop family friction, allow people to plan for the cost, and let students budget effectively. However, my suspicion is governments have never told people before, as they know parents will angrily reply “I can’t afford that”.

For now, to work it out yourself, take the loan you get and subtract it from the maximum amount available.

For students starting this year, living away from home (not London) the maximum loan is £8,200. I’ve done a full ready reckoner to help you work this out at www.mse.me/parentcontributions

The parental contribution has increased by 27% this year Last year only 35% of the loan was means-tested, this year it’s over 50% – a huge rise. If you combine this with slightly increased loans, many parents will be asked to pay £100s more than they would in a similar situation last year, with the increase as much as 27%.

Even adding the parental contribution on top it may not be enough Even the full loan amount won’t do much more than just pay the rent for many students, especially in expensive areas.

Of course, unlike when I went to university, when working at the same time was somewhat frowned upon, these days it’s accepted – and indeed often encouraged by employers. So if work is available, most students should grab it.

It’s worth noting too, there’s little students can do if their parents won’t give the money. They can try to be declared ‘financially independent’, but for that you usually need to be over 25, or married or can prove independence for three tax years.

How do you repay the loans?

The loans for tuition and maintenance are rolled into one by the Student Loan Company. Then…

a) You repay from the April after leaving uni, via the payroll, just like income tax - but only if you earn £21,000 or more.

b) Repayments are set at 9% of everything above £21,000, regardless of how much you borrowed; so the more you earn, the more you repay each month.

c) The loan's wiped after 30 years – whether you’ve paid a penny or not. And most people will repay for this whole time, in fact my calculations show only those on a starting salary of roughly £35,000 plus and above inflation pay rises after are likely to repay their full loan and interest.

d) Interest is set at up to inflation plus 3% depending on what you earn. Though you only actually repay this if you earn enough afterwards to clear what you borrowed in full.

In fact, a far better way to get the feel for the cost of the loan is to think of it like an additional tax that stops if you repay it or for most people after 30 years.

So earn over £21,000 and whereas most basic rate taxpayers pay 20%, recent graduates effectively pay 29%. For earnings over the higher rate tax band of £43,000 most people pay 40%, graduates 49%.

It’s one reason I campaign to have it renamed a ‘graduate contribution’ as other countries call our system. Calling it a loan is dangerous - it means our young people are educated into a ‘debt’ and then end up getting other types of much worse borrowing too.

For full info on how the student finance system works, including the fact the government has sadly changed terms for many students even after they started, see my full 20 student loan mythbusters guide at www.mse.me/StudentLoans.

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